No More Credit Card Debt: Now What?

In about 6.5 months, I will be free of credit card debt for the first time since 1998. Much like Inigo Montoya and the “Revenge Business”, now that it’s over, I don’a know what to do with the rest of my life.

Smithee formerly lived primarily on credit cards and the good will of his friends. He is a newbie to personal finance but quickly learning from his past mistakes. You can follow him on Twitter, where his user name is @SmitheeConsumer. View all articles by Smithee.

This may seem over simplified, but when it comes to small projects around the house, I stretch these projects out over many weeks, using my disposable income (DI – literally an envelope filled with $20 bills) to cover the costs. For example when I had a condo, the downstairs bathroom needed some work. So this is how I fixed it up:

paycheque #1 DI = new mirrored medicine cabinets. I installed them myself.
Paycheque #2 = new exhaust fan (with some help from Santa’s gift card from Home Depot)
Paycheque #3, electrician to install said exhaust fan (I didn’t make very much $$$ back then so I had to break the chore up)
Paycheque #4, purchase new flooring.
Paycheque #5 & 6 installation of new flooring. I ripped up the old flooring, but paid a professional to put new flooring down)
Paycheque #7 toilet repair
Paycheque #8 paint!

I did not spend all my DI on the bathroom work, just $40, $60, $80 here and there. Back then, there was a terrible recession where I lived and I lost my job. I got another job, a very crappy job at half the salary I used to make, so my DI was $60 a week. All and all it was very simple fix up project. It took a couple of months but there was the satisfaction in the end that the whole thing was paid for in good old fashion CASH. Plus I did not have the stress of a gutted bathroom to deal with. So maybe using a bit of DI here and there for some of the smaller jobs, will free up $$$$ for the other things you have on your list.

Assuming you already have $1k to $2k emergency fund then start on the car payment. Basically you want to pay everything off but your mortgage debt. So funnel all that credit card debt repayment to the car. When the car (and any other loans not including the mortgage) is paid for build up the emergency fund to a 3 month level. Then do the Roth. Once the Roth is maxed annually continue to save for other expenses that will eventually occur (like another car, replacing broken appliances, etc).

One thing to remember is by asking a bunch of strangers, you’re going to get general advice — good advice, yes, but not something that takes into account who you are, what you do, and what’s important to you. So when it comes to spending your excess (kitchen upgrade vs. video equipment for example) it’s going to be hard to get a respose that makes the most sense for you.

If you don’t have the 3 month savings buffer and something drastic happens, You will just go right back into Credit Cards. I recommend that as your first step. After that, there are a lot of good options, but that would be my first priority.

Noticed you added the 529 option – I “boo”-ed this. :) Sure, saving for your kids’ college education is great, but it should be low on the list. The common advice I hear is: You can take out loans for school. You can’t take out loans for retirement.

Once you finish off your CC debt, I think that you should celebrate. Do something to reward yourself for accomplishing your goal to reinforce your own good habits but don’t celebrate for too long. I like the idea of a party. :) Get started immediately on your next long-term goal after that.

Yeah, kids can pay for college themselves. Choose a good public uniersity and get a job. Mom and dad can help out some, but they shouldn’t sacrifice their retirement for college. That’s how I got through school – hard work and some help from mom and dad. I got through debt free and they chipped in enough to help me be debt free, but not so much it messed up their retirement. I did this for 1 undergrad and 2 grad degrees. And they are having a nice retirement. My kids will have the same options.

I agree with Stan in that it’s important to actually celebrate — in some small way — significant milestones, such as no longer having CC debt (congrats, by the way, a mere 6.5 months in advance). Don’t go overboard, but saving up for a bit and then having friends over for a party (or whatever) sounds like a good way to celebrate to me.

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